Berkshire Hathaway Inc. Stock Isn’t Going to Be What It Once Was

Things are changing fast for Warren Buffett's investment fund

There’s no two ways about it: Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) stock, under the guidance of legendary stock-picker Warren Buffett, has been a better bet than the broad market for any portion of the past 50 years of Berkshire’s existence.

Last year was no exception. While the S&P 500 mustered a heroic 22% gain in 2017, BRK stock — the A shares as well as the B shares — advanced nearly 30%. It was a microcosm of five decades of outperformance.

Will the next 50 years be as fruitful for current and would-be Berkshire investors? Anything’s possible, to be sure, but, on balance, there are just too many things working against the conglomerate going forward to make it the incredible investment it once was.

Irreplaceable

It’s a philosophical question that’s circulated for years: Is an investment in BRK stock an investment in Berkshire Hathaway or an investment in Warren Buffett?

In most cases, the answer is “both” and, to this day, there’s little doubt Buffett’s fingerprints are all over the conglomerate. At 87 years of age, though, not only has Buffett backed off a bit from the company, clearly he’s nearing the end of his involvement altogether.

In a superficial sense, the absence of Warren Buffett shouldn’t really matter. His heir-apparents Gregory Abel and Ajit Jain have both been with the organization for many, many years and are well-versed in the “Warren Buffett Way”.

That includes an understanding of the magical way Buffett does deals with companies, both publicly traded and privately held.

Case in point: Way back in 2011, the Oracle of Omaha orchestrated a deal with Bank of America Corp (NYSE:BAC) that essentially kept it afloat while it was struggling. Six years later, that $5 billion investment few gave a second thought to in 2011 had turned into a position valued at $12 billion. It’s worth even more today.

While Jain and Abel are savvy veterans in their own right, it’s not clear if either would have seen the opportunity Buffett saw at the time. Moreover, it’s not clear anyone not named Warren Buffett would have been able to negotiate such a deal with B of A. At this point, it’s the power of the name that turns heads.

Fewer Opportunities

Be that as it may, Buffett’s absence from the business isn’t the only thing BRK stock holders may want to chew on at this time. There’s also the not-so-minor possibility that Berkshire Hathaway is running out of things to invest in.

Seriously.

It’s been easy for fans and followers to chalk up the $109 billion in cash Berkshire presently has tucked away in its coffers as prudence. No need to force or rush a new investment, particularly when stocks feel like they’re overvalued thanks to a stunning post-election rally. Those who know Buffett know this is a very un-Buffett-like move, though. He’s cared little about timing in the past, and he’s rarely struggled to find companies to buy.

With that as the backdrop, something he said at the annual shareholders meeting in August takes on greater meaning. Buffett commented: “The question is, ‘Are we going to be able to deploy it?’ I would say that history is on our side, but it’d be more fun if the phone would ring.”

Thing is, the phone doesn’t seem to have rung in a while. Berkshire’s cash hoard has grown substantially from less than $40 billion in early 2013 to more than $100 billion now. The market wasn’t overvalued that whole time.

That’s not the only hint that Berkshire is running out of ideas now that it’s become a $500 billion behemoth. In last year’s shareholder letter, Buffett finally conceded that, going forward, BRK stock holders would see a “gradual shift from a company obtaining most of its gains from investment activities to one that grows in value by owning businesses.”

That’s not to say there’s no growth in investing in existing properties you already own. But, let’s face it, the bulk of Berkshire’s gains over the years has stemmed from the purchase of undervalued assets.

Bottom Line on BRK Stock

None of this is to suggest Berkshire Hathaway is doomed. Indeed, it’s going to be around in one form or another for as long as anyone reading this is likely to be alive.

It’s not wrong to plant these seeds in the back of your mind, though, particularly in the shadow of 2017’s rally that left BRK stock overbought and ripe for a little profit-taking.

The new tax laws that went into place this year will certainly boost Berkshire’s bottom line going forward, but one can’t help but wonder if the expectation of the tax-related benefit at the same time Buffett is starting to bow out makes this an “as good as it gets” moment for the organization.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.